Time for regulators. Part 2

    08 Jan 2022
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    American regulators’ attitude to cryptocurrencies seems to swing back-and-forth like a pendulum. One minute they wish (and act) to ban everything crypto-related as competition to fiat money, the second – they “let go of the reins”. The current swing is towards strengthening government control.

     

    The latest US infrastructure bill introduces the broadest possible characterization of cryptocurrencies and tokens. They are defined as “any digital equivalent of value”, giving regulators a lot of freedom in interpreting legislation.

    Of course, the flawed nature of the new law is apparent not only to the cryptocurrency market players but also to many lawmakers. There is now even a group of congresspeople proposing to amend the bill, particularly the section about taxing crypto companies. Those legislators argue for softening its clauses to prevent blockchain businesses from fleeing to other jurisdictions.

    The regulators, meanwhile, have already “smelled blood”. SEC Commissioner Caroline Crenshaw published an article on DeFi market projects in The International Journal of Blockchain Law. In it, she outlined the agency’s plans to tighten control over digital assets.

    And while most DeFi services are still hard to reach, the US Securities and Exchange Commission will also be able to regulate stablecoins. The US Treasury Department considers stablecoins a dangerous and opaque investor tool and has called for toughening regulation on them. To this end, both the SEC and the CFTC (Commodity Futures Trading Commission) will be given new powers.

    Those new powers and rules will be developed by the President’s Working Group on Financial Markets (PWG, which includes representatives from the Treasury, CFTC, SEC, the Federal Reserve System, and the Federal Deposit Insurance Corporation). The PWG has already put a law to Congress that introduces measures to regulate stablecoins similarly to bank deposits.

    At the same time, a completely different agency – the intergovernmental Financial Action Task Force on Money Laundering (FATF) – published a new version of the digital asset regulation guide, which sets standards for dealing with decentralized finance (DeFi) sector and non-fungible tokens (NFT). According to these rules, DeFi projects only come under the regulators’ supervision if any persons retain control or sufficient influence over the project. In a completely uncharacteristic move, the organization also called on the governments to show flexibility in introducing new regulations since market participants have difficulty introducing mechanisms to follow the updated standards.

    The FATF document clarified that a virtual asset (VA) is not just a digital representation of value but a commodity that must have a tradable component and transfer value. The regulator classifies NFTs as virtual assets only if used for payment or investment purposes.

    “Other NFTs are digital representations of financial assets already covered by the FATF standards. Therefore, they are excluded from the definition of VA but are subject to the standards as these types of financial assets,” – the paper states.

    другие лица сохраняют контроль или достаточное влияние на механизмы DeFi.

    The FATF presented its first version of the digital asset regulation guide in 2019. Back then, the organizations working with cryptocurrencies were required to comply with measures to combat money laundering and terrorist financing. The measures were extremely harsh – in many jurisdictions, creating a cryptocurrency exchange simply became too expensive, and many exciting projects died before the author of these lines’ very eyes.

    Now, with regard to the DeFi sphere, the regulator does not necessarily classify such projects as suppliers of digital assets. They are subject to FATF rules only if the developers, owners, operators, or others parties retain control or sufficient influence over the DeFi mechanisms.

    “Cases  where DeFi projects call themselves decentralized, when in fact there is a person with control and sufficient influence, are quite common,” – the latest guide clarifies.

    Back in the US, which still sets the tone for the entire cryptoindustry, rules are being developed for banks storing cryptocurrencies. American regulators are looking into the circumstances under which banking organizations can engage in digital asset-related activities – and, in particular, how custody services should be appropriately implemented.

    Finally, in the news from the “world of fiat”, which cannot but affect the crypto world – Joe Biden nominated Jerome Powell for a second term as head of the Fed.

    Powell first became the chair of the Federal Reserve under the previous US President, Donald Trump, in January 2018. Now the main problem faced by the Fed leadership is annual inflation, which accelerated to a three-decade high of 6.2% in October. Keep in mind that the Fed’s official policy since September 2020 has been to keep inflation below 2%. It is not entirely clear how to reconcile it with injecting trillions of dollars into the economy.

    What piqued our attention is Powell’s recent statement that the digital dollar will make Bitcoin obsolete. Now I wonder: will we see a grand battle between BTC and the American CBDC?

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